China's Economic Risks Rise

Policy debate heats up as economy cools.
An analysis by Michael Lelyveld
construction_305 Two workers walk past new apartment blocks under construction in Beijing on April 29, 2010.
AFP/Liu Jin

Signs of a slowdown are rippling through China's economy, raising concerns about the effects of government policies.

Reports suggest the economy has belatedly heeded Premier Wen Jiabao's call to cool overheated sectors like property development and drive down inflation. The question now is whether the government has gone too far.

"They put in place a policy for slowing the economy down and that policy has been very successful," Harvard economist Dale Jorgenson told RFA. "Now they have to navigate to the proverbial soft landing."

Monetary policies appear poised between tightening and loosening after the government eased reserve requirements for banks on Nov. 30 for the first time in nearly three years.

Earlier this month, officials seemed ready to declare victory in Wen's fight to curb price growth after November inflation fell to 4.2 percent from 5.5 percent the month before.

Similar success was seen in housing as the National Bureau of Statistics (NBS) reported on Dec. 18 that new home prices in 49 of 70 major cities dropped from October levels last month.

But some rethinking of the good news seemed to follow the government's annual central economic work conference in the previous week.


Despite month-to-month improvement, Xinhua noted that home prices fell in only four cities from a year before. Over the 11-month period, the consumer price index (CPI) also hit 5.5 percent, far above the government's 4-percent target for the year, the official news agency said.

The mixed results reflect the problems of dealing with complaints about property prices and inflation without creating suffering in other sectors.

In November, foreign direct investment fell from a year earlier for the first time in 28 months, according to the Ministry of Commerce. Eleven-month profits of central state-owned enterprises rose only 3.6 percent, compared with a 50-percent gain the year before, Xinhua said.

In October, the steel industry's profit margins plunged to 0.47 percent, an official of the China Iron and Steel Association told state media.

Beyond investment and industry, workers have borne the brunt of the slowdown. A Peking University study publicized this month by the official English-language China Daily found 40 percent of construction workers have experienced wage delays. Only 28 percent were paid monthly, the study said.

Despite the negative effects and mixed monetary signals, the National Development and Reform Commission (NDRC) has pledged to stick by its inflation-fighting stance.

"We should consolidate and expand regulative results in 2012 and continue to strictly implement measures to restrain speculative and investment needs for housing," said NDRC chairman Zhang Ping following the economic work meeting.

A survey by the Chinese Academy of Social Sciences found that 70 percent of the public blame inflation for lower living standards, China Daily reported.

But the government's tightening policies have also come in for blame.


Speaking to the British-based Observer on Dec. 17, one expert suggested China had ignored the effects that simultaneous slowdowns in Europe and United States would eventually have on its economy.

"If it had known what was going to happen in the developed world, it might not have been so tough," said Karen Ward, senior global economist at the international investment bank HSBC.

Dale Jorgenson rejected the criticism, saying China had little choice but to steer the economy toward slower growth, despite the development of the European debt crisis.

"That's great for hindsight. None of us really knew how serious the European problem was going to be, including the Europeans," said Jorgenson. "There are a lot of people who are claiming clairvoyance, but the Chinese don't claim that."

"I think they didn't have a perfectly realistic expectation about what the Europeans would be doing, but this is an unprecedented situation," he said.

The combined effects of the global downturn and China's policies may be long lasting. Jorgenson believes it may be some time before China returns to the 10.4-percent GDP growth
rate of 2010.

"I would project more like 7 percent over the next 10 years or something that," he said. "Ten-percent growth rates are just not in the cards. I think China's already been through its high-growth period and they now need to have a more sustainable growth path."

Derek Scissors, Asian studies research fellow at the Heritage Foundation in Washington, also says China had to target housing prices after the heady days of its 4-trillion yuan ($630-billion) stimulus program in 2009.


The priority should be to confront the inflation effects of the stimulus rather than the impact of the European debt crisis, he argued in an interview.

One reason is that the global slowdown leaves the huge tide of Chinese investment capital with no place to go other than real estate if monetary policy is loosened too fast, Scissors said. The result would be another surge in home prices next year.

"When you're paralyzed by inflation because you're so worried that you're going to get another spike in housing prices, your policy is not going to be effective," he said.

"There's no point in fighting this halfway. In for a penny, in for a pound," said Scissors. "They need to finish this job ... otherwise, they're trapped and they're in the worst of both worlds."

But others see dangers in China's inflated property market and confusion in its monetary policies.

"Now the bubble is visibly bursting," wrote economist Paul Krugman in a New York Times column, adding that China's policy statements "don't strike me as being especially clear-headed."

"I hope that I'm being needlessly alarmist here. But it's impossible not to be worried: China's story just sounds too much like the crack-ups we've already seen elsewhere," Krugman said.

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